Monday, January 29, 2018

Board
Chairman, Jon Matonis, and Managing Director, Liza Aizupiete, both
co-founders of Globitex spoke at the Cryptoeconomy Conference in London
on January 26, 2018.

Jon: I want to start off by saying something about the three functions of money. If
anyone takes an Economics 101 class, the first thing you learn in
monetary economics are the three functions of money. You have a store of
value, a medium of exchange and unit of account. Those three functions
are required for what economists refer to as a functionary monetary
unit.

Now
the confusion around it though is that they don’t all start at the same
time. They don’t start with unit of account and go backwards, there is a
specific sequence to these functions of money for it to evolve into a
successful currency.

An
example with Bitcoin was the first transaction, the famous pizza
transaction which would be about a $79 to $80 million pizza right now.
Actually it was two pepperoni pizzas. But that’s the current value of
the Bitcoin that was exchanged for that transaction. It was a
transaction from Florida to London.

The
reason people take something in exchange as a medium of exchange is
because they believe that it has value for them after they accept it.
They may not want to hold it but they may want to exchange it obviously
for something else. It starts with store of value which is the first
state that you have to have for anything to evolve as money. Then it
moves to a medium of exchange. It can’t happen the other way around
because it doesn’t make any sense for people to accept it if they don’t
think that it will have at least enough value for them to hold it and
get rid of it.

Then
the last function is a unit of account this is the final stage of
money. This is when you see goods and services priced in the dominant
fiat. So you go shopping in the store in the UK or Europe and on the
shelves it will say pounds or euros, this is the unit of account.
Bitcoin is not there, no cryptocurrency is there yet. This stage takes a
long time to get to unit of account because the government with legal
tender has such an advantage in this area through the requirement of
paying taxes and so forth that it’s very difficult for a newcomer to
break into the unit of account phase. When it happens though it will be a
massive disruption.

People
are already starting to price their services in Bitcoin, but because it
is so volatile they usually price it in another currency and then
through that currency they receive Bitcoin. So that’s not really a unit
of account. But one of the things that will be required to achieve a
unit of account is to have raw basic commodities priced and traded in
the digital currency which is Bitcoin. This is one of the things that
Globitex strives to achieve in this phase of its rollout, the trading
pairs of Bitcoin and raw commodities. So gold, silver, industrial
metals, crude oil, agricultural commodities, for example. This will
start to set, at least at a wholesale level, set the framework and the
basis for using cryptocurrencies as a unit of account which will
complete the three functions of money.

I’m
not just making this stuff up, you can go to a Bank of England report
and they have the same diagram where you have the nested functions of
money.

People
always ask me what do I fear most about the Bitcoin economy? What keeps
me up at night? If I’m such a believer I must have something that I
fear. What do I think will kill Bitcoin? Something like regulation, do I
fear regulations? OK none of those are things that I fear about
Bitcoin. What I fear the most is what is actually happening in the gold
market right now. And I fear that we will get to a point where the
exchanges themselves are successful but we will have
government-sponsored, state-sponsored trading where they will be able to
suppress the price artificially because they have an unlimited supply
of fiat.

There
are a lot of people that believe the gold market today is
suppressed — prices don’t reflect what would really be happening if it
were a true check on central banking. This is possible because unlimited
fiat can be used to do naked short selling on exchanges. The paper
market for Bitcoin in the futures exchange can be manipulated through
price suppression by making naked short selling. Naked short selling is
where you sell the commodity without actually owning it. Exchanges allow
this and it’s legal, you just have to have a certain amount of margin,
the exchanges have to manage contract limits and they have to warehouse a
certain amount for physical delivery.

Now
what is the remedy for this though? This is what keeps me up at night.
Eventually, I think the Bitcoin market will be manipulated in the same
way that gold and silver markets are. The remedy to this is to have
enough global exchanges, enough exchanges worldwide in different
jurisdictions, and even some that may be jurisdictionless. It doesn’t
matter if they are centralized or decentralized, what we need as a
defense is to have enough of these so that a single country or a few
leading governments can’t control a certain exchange. It’s very easy
with gold because most of the gold, paper gold, is traded in New York so
it’s very easy to suppress the price through one exchange that has the
majority of the supply. With Bitcoin we don’t have the mature exchange
market yet, but to the extent that we can get this globally we will be
able to apply the remedy before the attack that I fear.

This
happens to be one the feature of Globitex as well, I mean obviously
we’re going to be one of those exchanges in that ecosystem, but we’re
not going to be the only ones. We’re going to need several thousand
exchanges in different jurisdictions. Leading to the other point that I
wanted to make is, what is the next stage in all of this? So we have a
functioning currency which is a store of value and a medium of exchange.
We have exchanges that are spread out globally in various
jurisdictions, what is the next part of the evolution? Well, this is
what I hear from a lot of my client companies, is that they have no way
to hedge the balance sheet risk that they’re currently holding.

There
are a lot of companies that have Bitcoin and other cryptocurrencies on
their balance sheets, the only way to hedge that is to sell it, sell it
in the physical market, and remove the risk. They can sell it in the
futures market now for the last month, but that’s the cash settlement
market, not a physical settlement market. So it’s a little bit like the
tail wagging the dog when you have cash settled market without the
actual underlying thing being delivered. This allows them to at least
reduce some of that balance sheet risk without having to sell the
commodity. So it’s very helpful but still not 100% effective.

What
I think is going to happen in this space is futures will lead to an
options market where you have call option and put option, you’ll be able
to pay a premium for a call option and a put option. And you’ll be able
to protect the assets on your balance sheet for a known price. This
happens all the time in other multicurrency corporations, they’re using
derivatives to hedge that risk. At Globitex, the futures and options
market is one of the planned phased rollouts, but physically settled. So
they’re physically settled on the futures side.

The
other thing is that when we get to that stage, and we’re already
starting to see it, we start to see an interest rate market develop for
Bitcoin, and Ethereum. The Bitcoin interest rate, does anyone want to
take a guess at what the annual interest rate is for Bitcoin? It’s about
28–35% annually right now. It’s been as high as 350%.

The
reason we know what the interest rate is because the short sellers have
to borrow a Bitcoin in order to sell it. There’s an active two-way
interest rate market for Bitcoin. You only borrow it for a day or a
week, and the rates fluctuate between 28–35%. It’s very volatile so
sometimes it goes over 35%. Now I have named that index Bibor, so it’s
like Libor but it’s Libor for Bitcoin. So it’s a Bitcoin interbroker
offered rate. That is going to be a product one day, and that product
and that forwards curve, that interest-rate and the maturities schedules
that come out of that are going to be used in capital finance for the
crypto-economy. That’s why I love the name of this conference here
because we’re building the early capital markets for a new currency. It
can’t function any other way, it needs to have an interest rate.

So
Globitex will also be market maker in that interest rate curve. So just
like we have interest-rate futures now for the dollar, for the Euro,
you’re looking at overnight, one week, 30 days those will be the
maturities also for cryptocurrencies that are traded on crypto
exchanges. And to give you more color around that and more details
around that I want to introduce my co-founder at Globitex. She will do a
close-up look at what Globitex is planning. We’ve just completed a
successful private pre sale, so we are currently closed for any sales.
So this won’t be a sales pitch, I want to welcome my co-founder Liza.

Liza:
Thank you, my name is Liza Aizupiete. First I’m going to tell you a
little more about what Globitex is, second, I’m going to present a case
for and against a very popular notion of centralized versus
decentralized exchanges. Then I’m going to talk about why we are here,
and what actually got us started. And finally I’ll conclude with our
actual token sale, which is basically looking into the future of what
Globitex is planning to do.

So
first of all Globitex is actually an institutional grade crypto-fiat
exchange. Globitex was recently awarded an EU EMI license which is an
unprecedented license in this space for cryptocurrency businesses,
because it gives us the ability to actually act as our own bank for Euro
payments across the SEPA payment system. Which means for Euro payments
we actually don’t need to integrate with an intermediary bank, we will
be able to issue our own IBAN accounts.

Next,
we have the features of what actually makes Globitex special. Obviously
we’re not the first-comers, we are quite the latecomers to the
industry. But what actually makes us special is that we have a
completely functional API which actually, to date it would be fair to
say that none of exchanges have up to the level that we have developed.
The FIX API gives you a direct market access. Obviously, we also support
Rest API and web sockets. We are running a superior matching engine
with over 1 million transactions per second capacity. If you are a
market maker or a high-frequency trader, you will absolutely enjoy
working on our exchange.

Now
added to that, we are proudly touting our reporting tool. Something so
basic that every broker and every exchange should have. And we have
taken our time to actually develop it to a detail where you can pull
something called the net asset value. Something not everybody
understands or everybody needs, but if you’re an institutional broker,
or accountant, you would definitely appreciate the ability to have a net
asset value report on all trading activities. Our professional trading
platform features a well designed GUI interface for day and night
traders, and you can switch between night and day modes. You can also
choose to move around the modules of the trading platform, so it’s very
customizable.

Finally,
obviously there’s a lot of security that has been worked into Globitex
as a central custodian for cryptocurrencies. We have Bitcoin, Bitcoin
cash, soon Ethereum and Litecoin wallets. And as I already mentioned we
are EMI licensed, so it’s an amazing development, completely
unprecedented in this space and we’ll be very proud to deliver on that
and soon upon full integration with SEPA-MMS system.

Now
here’s the case for and against centralized and decentralized
exchanges. I totally agree with a decentralized monetary system because
this is a thing. As for an exchange there is actually a difference. So
here are the differences. For a decentralized exchange you still need to
do a KYC/AML, in fact in Europe following the banking directive you
will actually be forced or compelled to register and actually disclose
your personal details. By disclosing your KYC you are submitting these
details to a centralized service provider. Therefore by definition, even
if the transactions take place off chain, identification is already a
central point. Obviously for a centralized exchange, identification is
disclosed and centralized, it’s a standard adhering to AML laws.

For
volume, for decentralized exchanges you’re absolutely limited by the
on-chain transaction capacity, which is around seven transactions per a
second for Bitcoin. For Ethereum, in theory, maybe 15 to 30 per second
on a good day but that’s it. So on-chain transactions on a decentralized
exchange are very limited. Whereas for centralized exchanges it is
unlimited, and as mentioned, Globitex supports over one million
transactions per a second. Now, of course you are still able to exchange
on a decentralized exchange, in a limited way, whereas on a centralized
you can list so many things.

Globitex
will be listing futures, options, all the various types of securities
which cannot actually function on a decentralized exchange, it just
doesn’t work, due to transaction speed limitations, impairing price
discovery and liquidity. You need one centralized point of reference,
one point where all of this is clearly listed, quickly executed and
settled. And of course, you need several exchanges to do that, but these
must be centralized.

As
for use cases, obviously decentralized exchanges are going to be
exclusively peer-to-peer, whereas for centralized exchanges enable
global trade, hedgings, speculating, various types of investment. All of
that is enabled by centralized exchanges. It is very biased of course
because I am with a centralized exchange, Globitex is a centralized
exchange and it cannot really be a decentralized exchange unless we
solve the transaction speed per second issue. Maybe once we have
streaming prices I think we can revisit that. And if the regulator is
also on board with it perhaps one day it’s going to be all
decentralized.

So
this is just a very quick reminder of why we are all here, having
listened to the presentations of this wonderful conference. I just
thought that we need to take a look back and see why we’re all here.
Obviously it’s because of Bitcoin, Bitcoin came about and basically
changed pretty much everything. So just a couple of points, Bitcoin is a
distributed completely decentralized network of payments. It doesn’t
sleep on Saturdays or Sundays, like SWIFT or SEPA. The most important
however is that in 2015 on October 22nd here in Europe, Bitcoin was
actually defined as a currency. So on that date the European Court of
Justice pronounced that Bitcoin should be exempt of VAT. Which means
that it is effectively a means of payment and currency.

Now
speaking of exchanges, which diversified further our development into
becoming not only a spot cryptocurrency exchange, but actually go after
the next license, which will enable us not only peer-to-peer lending,
enabling interest rate futures, enabling commodity futures and token
indices futures. We are going after a regulatory approval and system
revamp in order to be able to actually become an exchange for securities
trading, that’s huge.

So
for our Globitex GBX ICO, the fact that cryptocurrencies are here to
stay, this is our basic premise. Bitcoin or bitcoin protocol based
crypto-economy scaling can be achieved by providing better market access
and more diversified product offering. The liquidity issue can also be
solved by developing cryptocurrency money markets to find an equilibrium
between supply and demand. Because money, if you think about it, is
also a thing with an inherent demand and supply. And only when and if
there is enough of a possibility for that demand and supply to meet,
only then would we truly see the relative value of that thing which in
our case is cryptocurrency.

We
believe that Globitex can be instrumental in scaling the cryptocurrency
economy by listing standardised derivatives instruments in money
markets and commodities with both cash settlement and physical delivery,
with bitcoin or Bitcoin protocol-based cryptocurrencies as the unit of
account.

Now
we have seen various types of tokens and ours is going to be a utility
token. Here’s the thing, you will be able to settle trades with the
Globitex GBX token. And if you’re an owner of our token you’ll also
participate in loyalty programs, which we envisage as market making
activities. We would incentivize you to actually help us make market or
provide liquidity by making that trade extremely profitable for you.
When we list futures, from gold to crude oil futures and we need market
makers to participate, we will be incentivizing you to use your tokens
to provide market on these new listings. So it’s a utility token not
only for you, but also for us, as an exchange. The token supply is
limited, or calculated at a €10 million market hard cap. The redeemed
tokens will be burned, and taken out of the circulation, therefore the
Globitex GBX token is deflationary, limited in supply and therefore
should be appreciating in value.

Make no mistake. We are witnessing a high-stakes protocol standards
battle play out in real time. And it is just as important as last
century’s battle for the internet’s TCP standard.

Current capacity constraints on the Bitcoin blockchain have brought us to this impasse.

The
Bitcoin protocol, as the dominant value transfer “network effect”
leader, battles against upstart cryptocurrency protocols like Ethereum
and Monero. But it also battles with itself as divergent forces push for
either on-chain scaling or off-chain scaling, hard fork or soft fork, SegWit transaction format or original transaction format.

The
so-called nuclear option is a prolonged, contested hard fork of the
Bitcoin blockchain because it risks splitting the network into two
competing chains, which is to no one’s benefit. Therefore, it should be
reserved as a planned formality or a last resort for extreme situations
rather than a perpetual form of “live” dispute resolution.

With so
much individual and institutional wealth essentially stored on the
Bitcoin blockchain, it can be extremely disconcerting when others try to
“fork” around with your money. Chronic forking is not synonymous with
wealth management and prudent capital accumulation, which require
stability and predictability. Importantly, smart contracts and
non-monetary applications will also rely upon relative stability since
the same native digital token also facilitates the proof-of-work
security model.

This article will examine how open-source
governance was designed to work within the Bitcoin protocol and how
users, miners and developers are locked in a symbiotic dance when it
comes to potential forks to the immutable consensus. Solutions will be
proposed and analyzed that maintain the decentralized nature of the
resulting code and the blockchain consensus, while still permitting
sensible protocol upgrades. Governance is not only about the particular
method of change-control management, but also about how the very method
itself is subject to change.

Open-Source Protocols and Bitcoin

Generally
referred to as FOSS, or free and open-source software, this source code
is openly shared so that people are encouraged to use the software and
to voluntarily improve its design, resulting in decreasing software
costs; increasing security and stability, and flexibility over hardware
choice; and better privacy protection.

Open-source governance
models, such as Linux and BitTorrent, are not new and they existed prior
to the emergence of Bitcoin in early 2009; however, they have never
before been so tightly intertwined with money itself. Indeed, as the
largest distributed computing project in the world with self-adjusting
computational power, Bitcoin may be the first crude instance of A.I. on
the internet.

As
a blockchain community grows, it becomes increasingly more difficult
for stakeholders to reach a consensus on changing network rules. This is
by design, and reinforces the original principles of the blockchain’s
creators. To change the rules is to split the network, creating a new
blockchain and a new community. Blockchain networks resist political
governance because they are governed by everyone who [participates] in
them, and by no one in particular.

Murck continues:

Bitcoin’s
ability to resist such populist campaigns demonstrates the success of
the blockchain’s governance structure and shows that the ‘governance
crisis’ is a false narrative.

Of course it’s a
false narrative, and Murck is correct on this point. Bitcoin’s lack of
political governance is Bitcoin’s governance model, and forking is a
natural intended component of that. “Governance” may be the wrong word
for it because we are actually talking about minimizing potential
disruption.

Where Bitcoin differs from other open-source protocols
is that two levels of forking exist. One level forks the open-source
code (code fork), and another level forks the blockchain consensus
(chain fork). Since there can only be one consensus per native digital
token, chain splits are the natural result of this. The only way to
avoid potential chain splits in the future is to restrict the
change-control process to a single implementation, which is not very
safe nor realistic.

Core development teams are a potentially dangerous source of centralization.

When it comes to Bitcoin Core,
the publicly shared code repository hosts the current reference
implementation, and a small group of code committers (or maintainers)
regulate any merges to the code. Even though other projects may be more
open to criticism and newcomers, this general structure reminds me of a
presiding council of elders.

Making hazy claims of a peer-review
process or saying that committers are just passive maintainers merely
creates the facade of decentralized code. The real peer-review process
takes place on multiple community and technical forums, some of which
are not even frequented by the developers and Bitcoin Core committers.

The BIP (Bitcoin
Improvement Proposal) process is sufficient and it’s working for those
who choose to collaborate on Bitcoin Core. Similar to the RFC (Request
for Comments) process at
the IETF, BIP debates about a proposed implementation can provide
technical documentation useful to developers. However, it is not working
for many involved in Bitcoin protocol development due to the advantages
of incumbency and the false appeal to authority with core developers.
If Bitcoin Core no longer maintains the leading reference implementation
for the Bitcoin protocol, it will be 100 percent due to this
intransigence.

Sensitive to the criticisms of glorifying Bitcoin Core, Adam Back of Blockstream recently proposed an option to freeze the base-layer protocol,
but at the moment that will only move all of the politics and
game-playing to what exactly the base-layer freeze should look like. It
is a nice idea for separating the protocol standard from a single
reference implementation and for transitioning the Bitcoin protocol to
an IETF-like structure, although it’s extremely premature for now.

Therefore, by default, that leaves us with several alternative Bitcoin implementations in an environment of continual forking.

Even Satoshi Nakamoto was critical of multiple consensus implementations in 2010:

I
don’t believe a second, compatible implementation of Bitcoin will ever
be a good idea. So much of the design depends on all nodes getting
exactly identical results in lockstep that a second implementation would
be a menace to the network.

“All code that impacts consensus is part of consensus,” Voskuil told Bitcoin Magazine.
“But when part of this code stops the network or does something not
nice, it’s called a bug needing a fix, but that fix is a change to
consensus. Since bugs are consensus, fixes are forks. As such, a single
implementation gives far too much power to its developers. Shutting down
the network while some star chamber works out a new consensus is
downright authoritarian.”

Multiple alternative implementations of the Bitcoin protocol strengthen the network and help to prevent code centralization.

Politics of Blockchain Forking (or How UASF BIP 148 Will Fail)

Contentious
hard forks and soft forks all come down to hashing power. You can
phrase it differently and you can make believe that two-day zero-balance
nodes have a fundamental say in the outcome, but you cannot alter that
basic reality.

A BIP 148 fork
will undoubtedly need mining hash power to succeed or even to result in a
minority chain. However, if Segregated Witness (SegWit) had sufficient
miner support in the first place, the BIP 148 UASF itself would be
unnecessary. So, in that respect, it will now proceed like a game of
chicken waiting to see if miners support the fork attempt.

Mirroring
aspects of mob rule, if the UASF approach works as a way to bring
miners around to adopting SegWit, then the emboldened mob will deploy
the tactic for numerous other protocol upgrades in the future. Consensus
rules should not be easy to change and they should not be able to
change through simple majority rule on nodes, economic or not.
Eventually, these attempts will run headfirst into the wall of Nakamoto consensus.

As far as the network is concerned, it’s like turning off the power to your node.

UASF BIP148 Nodes (1st August 2017)

There
is no room for majority rule in Bitcoin. Those who endorse the UASF
approach and cleverly insert UASF tags in their social media handles are
endorsing majority rule in Bitcoin. They are providing a stage for any
random user group to push their warped agenda via tyranny of the nodes.

The prolific Jimmy Song says that having real skin in the game is what matters:

Let’s
keep “majority rule” antics out of Bitcoin. There is no protocol
condition that activates “if we are all united” and that is a good
thing.

With enough hashing power, the mob-induced UASF BIP 148
will lead to a temporary chain split. However, the probability of a
Bitcoin minority chain surviving for very long is extremely low due to
the lengthy difficulty re-targeting period of 2,016 blocks. Unlike the
Ethereum/Ethereum Classic fork, that is a long time for miners to invest
in a chain of uncertainty.

Responding to a Reddit post for newbies who are scared of losing money around the 1st of August due to UASF, ArmchairCryptologist explains:

Your
advice is sound, but realistically, the most likely scenario is that
the UASF either wins or dies. If it gets less than ~12% of the hashrate,
it will not be able to activate Segwit in time, and it will almost
certainly die. If it gets less than ~20% I also wouldn’t be surprised to
see active interference with orphaning to prevent transactions from
being processed.

If on the other
hand it gets more than ~40% of the hashrate, the chance for a reorg on
the other chain is large enough that most miners will likely jump ship,
and it will almost certainly win. At over ~20% block orphaning attacks
won’t be effective, as it would split the majority chain hashrate and
risk tipping the scale. Which means that the only situation where you
will realistically have two working chains for an extended period is if
you get between ~20% and ~40% of the hashrate for the UASF.

The
collectivist UASF BIP 148 strategy will ultimately fail and that’s a
good thing. It is driven primarily by those with very little at stake
expecting the miners to stake everything by supporting a minority chain.
Pretty soon, you run out of other people’s money. This commenter on Reddit understands:

The
entire premise was that it was very cheap to switch, but very expensive
to stay. That’s when I realized the folly of it all; [it’s] only cheap
because they’re not staking anything. But someone has to stake
something.

And that’s what is going to cause it to fail. That and the lack of replay protection. People like this guy flip it around and genuinely believe the mining problem will
be solved by massively increased value. If they do somehow put enough
pressure on exchanges that list UASF, despite the lack of replay
protection, and if we take his logic a step further, UASFers are going
to be pushing everyone to “buy, buy, buy” UASF and “sell, sell, sell”
Legacy Coin. But without replay protection, they’re going to be
obliterated by a few smart people who realize there are huge gains to be
had.

Alphonse Pace has an excellent paper describing
chain splits and their resolution. He walks us through compatible,
incompatible and semi-compatible hard forks, arguing that users do have
power if they truly reject a soft-fork rule change:

…
users do have power — by invoking an incompatible hard fork. In this
case, users will force the chain to split by introducing a new ruleset
(which may include a proof-of-work change, but does not require one).
This ensures users always have an escape from a miner-imposed ruleset
that they reject. This way, if the economy and users truly reject a soft
fork rule change, they always have the power to break away and reclaim
the rules they wish. It may be inconvenient, but the same is true by any
attack by the miners on users.

The Future of Coordinating Protocol Upgrades

What group determines the big decisions in Bitcoin’s direction? Ilogy doubts that it is the developers:

Theymos
almost completely foresaw what is happening today. Why? Because Theymos
has a deep understanding of Bitcoin and he was able to connect the dots
and recognize that the logic of the system leads inevitably to this
conclusion. Once we add to the equation the fact that restricting
on-chain scaling was always going to be perceived by the ‘generators’ as
something that ‘reduces profit,’ it should be clear that the logic of
the system was intrinsically going to bring us to the point we find
ourselves today.

Years later these two juggernauts
of Bitcoin would find themselves on opposite ends of the debate. But
what is interesting, what they both recognized, was that ultimately big
decisions in Bitcoin’s direction would be determined by the powerful
actors in the space, not by the average user and, more importantly, not
by the developers.

The developer role can be thought of as
proposing a variety of software menu choices for the users, merchants
and miners to accept and run. If a software upgrade or patch is deemed
unacceptable, then developers must go back to work and adjust the BIP
menu offering. Otherwise, mutiny becomes the only option for
dissatisfied miners.

In “Who Controls Bitcoin?” Daniel
Krawisz says that the investors wield the most power, and because of
that, miners follow investors. Therefore, the protocol upgrades likely
to get adopted will be the ones that increase Bitcoin’s value as an
investment, such as anonymity improvements being favored over attempts
at making Bitcoin easier to regulate.

In the future, miner
coordination via a Bitcoin DAO (decentralized autonomous organization)
on the blockchain could be the key to smooth and uneventful forking.
Self-governing ratification would allow diverse stakeholders to
coordinate protocol upgrades on-chain, reducing the likelihood of
software propagation battles that perpetually fork the codebase.

Attorney Adam Vaziri of
Diacle supports a system of DAO voting by Bitcoin miners to remove the
uncertainty around protocol upgrades. He readily admits that he has been
inspired by Tezos and Decred.

Prediction
markets have also been proposed as a method to gauge user and miner
preferences through public forecasting, the theory being that these
prediction markets would yield the fairest overall consensus for
protocol upgrades prior to the actual fork.

The question remains:
Is coin-based voting based on allocated hash power superior to the
informal signaling method utilized today? Are prediction markets or
futures markets a viable method to gauge consensus and determine
critical protocol upgrades?

I’m not optimistic. On-chain voting
and “intent” signaling are both non-binding expressions while prediction
and futures markets can be easily gamed. Therefore, while Tezos and
Decred represent admirable efforts in the quest for complete resilient
decentralization, I do not think Bitcoin protocol upgrades of the future
will be managed in this way.

The Bitcoin ecosystem doesn’t need to achieve a social consensus prior
to making changes to the protocol. What has clearly emerged from the
events of this summer is that Bitcoin has demonstrated an even stronger
degree of immutability.

There is no failure of governance and there is no failure of
the market. The non-authoritarian forces at play here are functioning
exactly as they should. Protocol upgrades in a decentralized environment
are an evolutionary process, and that process has matured to the current six stages of Bitcoin protocol upgrading, with some optional variances for BIP 91:

(b) Informal intent signaling based on miners inserting text into the coinbase for each block mined;

(c) Block
signaling period where miners formally signal a designated “bit”
trigger for BIP lock-in, based on “x” percent over a “y” number of
blocks period;

(d) Block activation period after BIP lock-in,
which sets a secondary period of “x” percent over a “y” number of blocks
for activation;

(e) Primary difficulty adjustment period (2,016 blocks) where “x” percent of miners must signal for the upgrade to lock in;

(f) Secondary difficulty adjustment period (2,016 blocks) required for the protocol upgrade to activate on the network.

Conclusion

This would not be the first fork in Bitcoin and it won’t be the last. If we believe in the power of Nakamoto consensus and probabilistic security, then the secret to uneventful protocol upgrades is smoother and more reliable signaling by miners.

July
has been a tough month for Bitcoin, but it has also been pivotal. Even
though I doubt the probability of success for UASF BIP 148, some may say
that the threat of the reckless UASF on August 1 played a role in the
rapid timeline for SegWit2x/BIP 91, and I agree with that. Game theory
is alive and well in Bitcoin.

The design of Nakamoto consensus
provides the ultimate method for decentralized dispute resolution by
placing that decision with the hashing power and the built-in incentives
against 51 percent attacks. In fact, Tom Harding considers miners to be
the only failsafe in Bitcoin:

Tuesday, July 11, 2017

I first met my Globitex.com co-founders Liza Aizupiete and Andris Kaneps at an inspired café in central Copenhagen during early 2015. Their mantra has always been that Globitex is a trading platform built by traders for traders. Unsurprisingly, that guiding philosophy has permeated every design choice since inception.

As
my background is in foreign currency and derivatives trading, I have
always aimed to launch a cryptocurrency exchange. In fact, I worked on
putting together a Gibraltar-based investment group to purchase the
original Mt. Gox from Jed McCaleb in early 2011, however the market
proved too immature to finalise the reluctant investor commitments.

Since
that time, bitcoin and other cryptocurrency exchanges have matured
greatly, expanding into multiple trading pairs, margin trading, and even
derivatives trading. All of this innovation has led to increasing
liquidity and market depth for bitcoin trading as well ushering in the
sophisticated hedging and risk management strategies desired by
corporate treasurers.

So,
where does the bitcoin exchange industry go from here? It already
boasts one of the most predictable revenue streams in the Bitcoin
ecosystem with steadily increasing volumes that generate commissions in
both up and down markets. And liquidity is “sticky” giving incumbents a
distinct advantage. But, traders also have a multitude of choices with
at least 400 different exchanges and brokers around the world.

Three clear mega-trends
are emerging in the bitcoin exchange industry: (1) an explicit
distinction between global exchanges and local, or regional, exchanges;
(2) a tendency towards the introduction of clearing members to diffuse
the counterparty risk away from the exchange operator; and (3) increased
use of margin trading and futures and options contracts.

Globitex is uniquely structured to benefit from all three mega-trends.

A
global exchange aims to be a provider of maximum liquidity at the most
attractive spreads. It accomplishes this by facilitating ease of trading
for the greatest number of clients around the world, typically by
providing the most common international transfer capabilities and
trading pairs against the leading world reserve currencies.

Conversely, local exchanges
will focus on a specific jurisdiction and most likely localise the
language and the payment APIs for that audience specifically. Local
exchanges do not facilitate global price discovery and they vary by
operating model. In a broker model, the company buys and sells
cryptocurrency with customers by maintaining their own inventory book
and setting a bid/offer spread. Cryptocurrency brokers also do not hold
customer balances like they would under a commission-based,
order-matching exchange model.

With bitcoin, a clearing house
can be thought of as a wholesale liquidity provider clearing
transactions in an over-the-counter (OTC) market or a futures exchange.
The clearing house reduces the settlement risks by netting offsetting
transactions between multiple member clearing firms and by providing
independent valuation of trades and collateral accounts.

Today’s
bitcoin exchanges do not employ clearing members thereby consolidating
the counterparty risk into a single entity rather than diffusing it
among multiple clearing firms.

Globitex
will eventually introduce a program for member clearing firms to
process transactions on the exchange platform with Globitex monitoring
the credit worthiness of member clearing firms and, ideally,
establishing and maintaining a guarantee fund (for leveraged trading)
that can be used to cover losses that exceed deposited collateral from a
defaulting clearing firm.

In
the not-too-distant future, an exchange will have to provide adequate
margin trading on both the long and short side to be considered a viable
exchange contender. The market demands and pressures for leverage will
be too great for any exchange that wants to remain a liquidity leader.

Therefore,
to facilitate margin trading, Globitex will introduce a two-way
borrowing facility for bitcoin and fiat currency. Today, the most robust
bitcoin lending facility is offered through the Bitfinex exchange with
statistical data provided by BFXdata.

The
development of a true Bitcoin economy requires the formation of capital
markets with a corresponding interest rate duration curve across 1-day,
30-day, 90-day, and 1-year borrowing rates. Globitex will make a market
in fiat-to-XBT swaps and XBT-to-fiat swaps for purposes of margin
trading.

Additionally,
Globitex will aggregate the leading interest rate markets for bitcoin
to form a tradeable interest rate product on its exchange. Similar to
LIBOR, the aggregated reference rate will be referred to as BIBOR
[Bitcoin Inter-Broker Offered Rate], which is a term first coined in
CoinTelegraph, “Bitcoin Needs Its Own Version of LIBOR.”

Globitex
also intends to expand into standardised futures and options products
that allow risk managers and speculators to trade the bitcoin exchange
rate in the same way that they currently trade precious metals, equity
indices, bonds, grains, foods, livestock, and crude oil.

Inevitably, we will see new decentralised trading methods, trustless security models and multi-signature techniques, such as threshold signatures,
increasingly deployed to prevent against exchange hacks and exit scams.
However, the larger trend is still towards gaining multiple entry
points onto the exchange platform, because liquidity begets more liquidity.

Above
all else, an exchange is ultimately defined by its integrity and the
integrity of its principals over a demonstrated period of time.

Monday, July 10, 2017

London, United Kingdom July 10, 2017 (Newswire.com) - A European Bitcoin exchange platform Globitex has rolled out its beta release. Presently running in a limited beta, Globitex is accepting global customers on invitations only. The team includes the former executive director of The Bitcoin Foundation Jon Matonis, serving now as a Chairman at Globitex.

"Globitex is a genuine breakthrough for professional and institutional traders with full support for the FIX protocol and a slick UI. Traders will appreciate a platform designed by traders and the Globitex team has decided to start with the Euro-Bitcoin trading pair to be followed by other currency pairs and margin trading", states Jon Matonis.

Globitex has begun operations by offering a Euro-Bitcoin exchange product (XBTEUR), with an aim to expand fiat and cryptocurrency offering in the near future. Algorithmic trading is fully supported by FIX and REST API interfaces.

The team has been developing the product for the past three years with the goal of providing a more professional trading environment for institutional traders. As a startup, since early 2014 the project was self-seeded by the founders and in 2015 raised the first venture capital funding. The round was carried out by a group of private investors lead by an entrepreneur and venture capitalist Viesturs Tamužs. The company has raised more than EUR 900,000 to date.

“The Globitex team have built a solid exchange product, which is set to prove itself as a reliable service provider in this exciting and fast-paced cryptocurrency industry”, admits Viesturs Tamuzs.

The current Beta release offers to trade at 0% commission and is expected to run with this pricing until public launch. Deposits and withdrawals are available via SEPA and SWIFT.Source: Globitex.com

Thursday, May 11, 2017

We now
have Blockchain concepts surfacing for almost everything so of course
music was always going to be an attractive and obvious area to target.
There are many players in this space now and it has become very
fashionable.

But
there is one Company who’s founder has been actively exploring what the
future of music might look like for over 10 years, and since 2006 that
vision always hinged on the need for a global digital currency to
underpin a new model for music distribution. This vision was first
articulated several years before Bitcoin was invented. I’m talking about
Simon Edhouse the Managing Director of Bittunes.

Unlike
most other startups in this field, Bittunes is not basing their
business case solely on a technology like Blockchain, or by creating a
new alt-coin or token, (to their credit they rejected lucrative offers
to do so). Strategies like that are easy to duplicate so tend to occur
in clusters, as can easily be seen by the plethora of ICO’s and
Blockchain focussed startups around.

What
separates Bittunes from other startups that utilise blockchains in some
way, and why they are particularly interesting to me as an economist,
is that their core vision is based on a simple yet quite audacious
economic model, and the more I look at that model, the more it makes
sense.

The
Bittunes model expressly tries to do one thing. It attempts to define
the simplest mechanism for music to be traded as directly as possible
between Artist and fan, while at the same time re-configuring the reward
structures that have been the basis of the music industry for over a
hundred years.

Startups come and go, but good economic models tend to transcend changing fashions.

Historically
it has been the providers of physical and then digital music recordings
that have made money in the music business, and as a rule these have
been the intermediaries in music’s supply chain, Record Labels, Rights
organisations, Apple etc. It has never been the receivers of music that
made money. That just wouldn’t make sense, would it? Read on..

In
music’s value chain there have always been ‘rent seekers’, manoeuvring
to increase their share of the pie. Occasionally, disintermediation
occurs as layers are removed, creating new value, but more often than
not other layers are inserted as new entrants nudge their way in with
new services.

The
accepted view is that these entrants provide new value so of course
become part of the music industry ecosystem. However, there are now so
many heads in the trough, and the largest have been around for so long
that, collectively, their right to harvest more than 75% of music’s
overall pie has remained largely unchallenged.

The
big names in music, Justin Bieber, Rihanna, One Direction etc reap the
lion’s share of what remains, and the massive long tail of aspiring
Artists are left with the crumbs. Non main-stream artists do it for
love, not money, and music’s consumers devour heavily subsidised (free,
ad supported) streaming playlists thereby maintaining this status quo.

Artists produce, consumers consume, corporations get rich

So,
how can this cycle be broken, without business processes to drive any
commercial activity? So that consumers get much more variety and a
multitude of currently invisible artists get a more equitable deal.

The
power and appropriateness of the Bittunes model to help solve music’s
entrenched problems, is that firstly, it correctly identifies which
party can provide sufficient value to Artists to turn this inequitable
system on it’s head, and then, secondly, it meticulously deals with the
contingencies related to delivering that value via it’s business logic.

That
party in music’s value chain is of course the music fans themselves,
because music fans are not only the purchasers of music, (be it by
subscription to a streaming music service or downloads), they are also
the highly interconnected network that Artists need. They hold the keys
to some of the most valued processes on the internet, and drive the
value of companies like Google, Facebook etc, and in the Bittunes model,
they are the new recipients in, plausibly, music’s final
disintermediation.

The
novel aspect of the Bittunes model is that they have worked out a
sensible way to allow fans to earn money in partnership with the artists
they follow. Further, the process has been designed to distribute
revenue with as little cognitive cost for users as possible. In other
words, it’s not just the economic model that is simple and neat, the
logic around it has been carefully designed with a view to making it
nearly friction-less for all parties.

The
crux of the model is based on revenue sharing with meaningful clusters
of users. To explain exactly how that ‘meaningfulness’ is defined, and
how selection is determined, would be to give away too much, but let’s
just say there is an abundance of options available to both supply and
demand to self sort into appropriate groups, to generate remarkable
value to both.

Why was this inventive step not already completely obvious to all of us?

To
explain that, might require a bit of historic analysis. There is a
pervasive narrative with regard to music that is continually reinforced
in the media that the only music worth mentioning is that which is owned
and controlled by the music industry. For example:

“Today, three major Record labels own well over half of the Western World’s Music” ~ The Economist [1]

It’s
not hard to see how this situation has developed. The Recording
Industry as we know it grew out of the combination of sheet music
publishing of the music played at live music events, followed by the
technological breakthroughs of the 1880’s and 90’s that produced actual
recording devices, (cylinders of tin, wax, celluloid leading to the12
inch record in 1903 [2]). Gradually big business saw the opportunity for
large profits by the mass production of vinyl records, and the rest as
they say is history.

So,
throughout most of the late 20th Century, were it not for this
industry, popular music simply could not be easily heard or obtained. So
in a very real sense we have all perhaps been conditioned to see the
music industry and the music we listen to as inseparable, but does this
still even make sense?

It
should come as no surprise that with the advent of the Web and
internet, that some profound macro changes have been occurring that have
direct relevance to the empowerment of ordinary people in this new
global marketplace.

A better understanding of the rights of the ‘Primary Publisher’ and how Bittunes also sidesteps the copyright industry

One
of the tenets of the Bittunes team’s philosophy as they have
endeavoured to explain this model has been to stress the significance of
the role of the Artist as ‘Primary Publisher’. In the context of how
Bittunes operates, this alone has very significant implications for the
size of the total addressable market for the company’s services.

Legally, when an Artist writes a song, two rights are created; the right to the recording
(a.k.a. the master) and the right to the underlying song itself (a.k.a.
the publishing) [3]. Until an Artist signs away these rights to a
Publishing House or Record Company, they are the publisher.

Music
distributed by Bittunes is in fact ‘self published’ by Artists on the
platform using an inherent provision within the legal deed of Creative
Commons and applying that to the ‘Attribution-NonCommercial-NoDerivs CC
BY-NC-ND’ License whereby any of its conditions can be waived if
permission is gained from the copyright holder. In effect, this simple
caveat allows this license to be used for commercial purposes.

So,
what does this boil down to? It means that, whereas companies like
Spotify can only operate in a strictly defined set of territories,
Bittunes is free to sell music anywhere in the world, effectively
opening up a global market of billions of music consumers in territories
like China, India, Russia and Africa that services linked to the main
stream music industry are not able to access.

It
is interesting to note that Spotify’s recent purchase of
Music/blockchain startup ‘mediachain,’ after a bit of analysis, seems to
be less about innovation and more about the enormous difficulty Spotify
has had in keeping track of the myriad complex rights agreements that
apply to the music they stream. If anything it provides more evidence
that a new simpler approach to music publication is overdue.

As Simon pointed out in his recent article ‘What is the ideal Music Stack?’
most music blockchain startups are focusing on integrating with the
existing music industry in some way. The Bittunes thesis and strategy is
a purist approach that projects a future ideal reality and sets a
course toward that goal.

Needless to say, most entrepreneurs avoid challenges like this

The
mission that Simon and his team have embarked on is a David and Goliath
type quest, with one implied aim; to render the music industry as we
know it, irrelevant. To be able to deliver on a promise like this is
incredibly difficult, and requires skills, knowledge and intuition in a
number of areas.

However,
in this instance we have an entrepreneur who has significant domain
knowledge as an award winning songwriter and film music composer
himself, with a Master’s degree in science and technology
commercialisation and an obsession with disruptive innovation theory. He
has plenty of his own skin in the game, investing around $150k into the
business, and after several years of operation Bittunes now has users
in more than 90 Countries.

What
chance does it have of succeeding? In its favour, the technical and
market conditions have probably never been better, and certainly it is
widely understood that there is a pressing need to improve the fortunes
of Artists around the world.

However,
as is now also widely accepted, good entrepreneurs see realities that
other’s do not, and great entrepreneurs have the courage to pursue
opportunities that average entrepreneurs would never contemplate. My
money is on them succeeding.

Incidentally,
they are raising funds at the moment at a relatively low valuation, and
not as an ICO, but for real equity. A savvy hedge against the
prevailing orthodoxy with regard to the future of music IMO.

Disclosure: I am on the Bittunes board of directors and a shareholder in the company.

Wednesday, May 3, 2017

Former Bitcoin Foundation director Jon Matonis doesn't waste any time
asserting that his new employer is seeking to disrupt bitcoin's
established development process.

Matonis, who joined the secretive startup nChain today, is quick to
state that this is the ambition of the London and Vancouver-based
operation he now claims has 60 full-time employees, including infamous
developer Craig Wright.

As reported by Reuters,
nChain was started by Wright, the 46-year-old computer scientist who
claims to be bitcoin's pseudonymous creator Satoshi Nakamoto (though he hasn't offered much evidence).
To date, nChain hasn't offered much to support its assertions that it's
now the industry's best-funded startup either, hinting only that it has
received more than $100m from Malta-based high-tech private equity fund
SICAV plc as part of an acquisition.

Long the subject of criticism for the significant financial support
it provides to developers working on bitcoin's open-source protocol and
its primary implementation Bitcoin Core, Blockstream has been
villainized for that group's roadmap for scaling bitcoin, specifically
its decision to prioritize innovations that don't alter a hard-coded
limit on block size.

Matonis told CoinDesk:

"I immediately recognized nChain would be an effective challenger to Blockstream, which is definitely needed in the space."

In conversation, Matonis echoes a familiar refrain, that Blockstream and Bitcoin Core are too intertwined, and that Core's roadmap doesn't have broad community support.

London, United Kingdom May 2, 2017 – Blockchain
pioneer nChain announces the appointment of Bitcoin Foundation Executive
Director Jon Matonis as its new Vice President of Corporate Strategy.
In this position, Matonis will support nChain’s business growth by
developing commercial relationships, and evaluating opportunities for
strategic investments and acquisitions.

Jon Matonis is widely recognised as a leading Bitcoin researcher and
is a non-executive board director for several notable companies in the
space. Since 2012, his technology and security writings have appeared in
publications such as Forbes, CoinDesk, Bitcoin Magazine, American Banker, and PaymentsSource.

Jon is also a founding director for the Bitcoin Foundation which
served as the industry’s first nonprofit trade association originally
chartered to provide financial compensation for voluntary protocol code
developers and to promote the vision of Bitcoin worldwide. His career
has also included senior roles with Sumitomo Bank, VISA International,
VeriSign, and Hushmail.

Additionally, Matonis created the first and leading general price index for Bitcoin known as the Bitcoin Price Index
(BPI), hosted the largest ever Bitcoin/blockchain conference to date in
Amsterdam during 2014, and enlisted seven regional chapter offices to
the Bitcoin Foundation from countries such as France, Germany, and
Bangladesh.

Arthur Davis, Director of nChain Holdings Limited, comments:

“Jon was immediately attractive to nChain. During his notable career, he has consistently led the integration
of financial services and cryptography. His work has included foreign
currency trading for Visa International, financial platform sales for
RSA’s VeriSign – securing its first $5 million in revenue – and
end-to-end encrypted messaging for Hush Communications where as CEO he
recruited PGP’s Phil Zimmermann as Hushmail’s Chief Cryptographer.

“Jon’s philosophy for the Bitcoin protocol and network is fully
in line with nChain’s vision of on-chain scalability with
decentralisation, advanced native scripting for the construction of
smart contracts, and a dedicated move away from monolithic software. “We are excited to have Jon’s deep industry experience on our
team, and look forward to working with him to achieve our vision for the
Bitcoin blockchain.”

Bitcoin is the dominant value transfer protocol. The collective
computing power directed to its network is now 3.7 exahashes-per-second
and growing, making the Bitcoin blockchain best suited to directly
enable and facilitate nChain’s transformative vision.

In accepting the new management team position, Matonis comments:

“The resources and funding in place at nChain provide a unique
opportunity to reshape the existing landscape of Bitcoin protocol
influencers. It is imperative that we move towards a status quo where
the actual protocol standard is separated from its primary reference
implementation, similar to the existing architecture of the Linux kernel
and its low-level abstraction layer.”

In line with this view, nChain advocates for the formation of a
neutral standards organisation to coordinate and manage the Bitcoin
protocol and technical standards which in the long-term will result in a
more robust software design and a flourishing of compatible
implementations.

Matonis adds:

“The gradual elimination of trusted third parties from our
economic and legal infrastructures belies a serious and unprecedented
reorganisation of many legacy social structures. The winners will be
those select individuals and entities that finally liberate themselves
from the current centralising, rent-seeking chokepoints. I am excited
to work with nChain to support growth of the blockchain ecosystem for
everyone’s benefit.”

The quality and breadth of relationships that Matonis brings to
nChain allow the company to quickly ascertain and exploit available
market opportunities, and to assist its business partners to get up to
speed rapidly on the design and implementation of disruptive solutions
that challenge the traditional gatekeepers.

In his role with nChain, Matonis will also continue providing thought
leadership on blockchain technology. In 2011, Matonis was named Person
of the Year by Digital Gold Currency Magazine and in 2015 he was appointed to the Editorial Board for cryptocurrency and blockchain technology journal Ledger.
Currently, he is noted on the lists for both the Top 100 Fintech
Influencers and the Top 100 Blockchain Insiders in the Crypto Sphere.
For more information on Matonis, listen to his recent Virgin Podcast.

ABOUT NCHAIN: nChain is the global leader in
research and development of blockchain technologies – a distributed,
decentralised ledger that chronologically records transactions in an
immutable way. The nChain group of companies has grown to a team of in
excess of 60 world-class scientific research, engineering and other
professionals primarily based in London, United Kingdom and Vancouver,
Canada.

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995